We’ve covered a good bit of ground in our blog series on Business Improvements. We discussed documenting the Current State of the business processes, identifying process improvements and how these items affect the resulting Future State. Next, we explored the need to identify in detail the types of financial savings that will accrue to the organization operating in the Future State. The output of this process is well-defined by the Business Case, which is the defining factor in starting a business improvements project.
The next obvious step in your business improvements should be to create an ERP project plan. But, as we discussed, implementing the project plan requires a relentless focus on the individual tasks required each week to keep each project step on track.
Assuring Your Return on Investment
This brings us to the last step in the process of Business Improvements: assuring a return on investment. Purchasing and implementing an ERP system is a very expensive proposition. As such, assuring the improved performance required to pay the bill is crucial to the project’s success. The first step to bringing a project to completion is having a solid set of performance metrics.
The performance targets expected as a result of your ERP investment were defined in the Business Case, which was covered in a previous blog, “Developing the Business Case.” These targets will form the basis on which to measure the business performance after implementation.
Generally, it’s a good idea to give your team a chance to assimilate to the new system and related processes to the business improvements. In most cases, a period of 3-6 months will give your team the opportunity to get used to the new business processes and work out any bugs that might exist. In developing your annual business plan, take time to explain to your team how it’s not the operational improvements that come from a modern ERP system that provide the potential for your team to improve the business, it’s how your team applies and builds on this potential that will determine the ultimate success of the project and investment.
Is Your Performance Measurement System Working For You?
If you have a performance measurement system, take a step back and look at it with a critical eye. Is it doing its job and providing you with a timely picture of your organization’s health? A good book on the subject is The Balanced Scorecard by Robert Kaplan and David Norton. As you read this book or other reference sources, keep in mind that it is important to have both strategic and tactical measures.
Strategic performance measures tend to be financial and are usually lagging measures. That is, orders are received in a period, actions are taken to deliver on these customer orders, and investments are made. At the end of the period your financial department totals up the revenue, expenses and investments made. The result is your balance sheet, income statement and a report covering your cash flow. These are important reports and if you’re a public company, they are also required reports that are extremely high-level.
Functional Areas of Business Improvements
It’s in these functional areas that business improvements from the ERP system will be implemented and performance will be realized. Some key areas of tactical performance measures follow:
- Productivity – Productivity is straight-forward, output/input. This could be a traditional standard hour approach or something as simple as sales or shipments per employee or hours worked. This can be measured in standard versus actual hours, output per employee, or output per labor hour.
- Process Cycle Time – This measure tracks how long it takes for an item to work its way through a process. Modern ERP systems have solid data tracking capabilities at many points in a process, making it relatively easy to access these dates to calculate the elapsed time.
- Inventory Turnover – This is a foundational metric in ERP systems, but with modern ERP you have the ability to track many other types of inventory, i.e. sales orders in queue, unpaid invoices, unreleased job orders, etc. This can be based on tangible inventory or a backlog of tasks and paperwork.
- Overtime & Stock-outs – These are also easy measures with your ERP system and represent errors in using the system or misreading or missing signals from the system.
Proper measurements in these areas along with aggressive improvement targets will go a long way towards assuring that your ERP investment pays off. There are many articles out there identifying these tactical performance measures in detail. Studying these articles and coming up with ways to apply them to your business will both pay for the ERP investment and provide a scorecard to take your organization to new heights.
These measures can be calculated on a daily, weekly or monthly basis providing personnel in these functions are allowing them to take actions that will yield the expected results at month-end.
Tips For a Smooth Month-End
An effective tool at month-end is to have each functional area prepare a summary report using their performance metrics as a basis. These reports should provide a summary of how unfavorable performance is being addressed and how favorable performances were achieved as a means of sharing continuous business improvements success. Scheduling a regular monthly review meeting where these functional managers present this performance to the senior staff both shares positive improvement ideas and provides a level of peer pressure.
In summary, you’ve seen how upgrading your ERP system is really a multi-faceted project that requires a solid understanding of your business improvements process both currently and in the future. Next you need to define in detail the expected financial returns and the actions required to realize them. And finally, ERP implementation of a solid set of performance measures to manage progress toward this goal.
Good fortune to you and your team in your business improvements journey.
To further your education on business improvements, refer to our whitepaper “A Roadmap for Business Performance Improvement.”